Detailed Rationale

CRISIL Ratings has removed the rating on the bank facilities and commercial paper of Ashoka Buildcon Limited (ABL) from 'Rating Watch with Developing Implications' and has reaffirmed the ratings at 'CRISIL AA-/CRISIL A1+'; while assigning a ‘Stable’ outlook to the long term rating.

 

The rating action reflects strong business and financial risk profile of ABL despite the large impairment of Rs 770 crore booked by the company in the third quarter of fiscal 2022. The impairment was on account of subpar performance of the 5 BOT toll assets that are being sold to Galaxy Investments II Pte Ltd, an affiliate of Kohlberg Kravis Roberts & Co L.P. (KKR) by September 2022 and to provide for the exit of Macquarie SBI Infrastructure Investments Pte Ltd and SBI Macquarie Infrastructure Trust (SBI Macquarie), which together own 34% shareholding in Ashoka Concessions Ltd (ACL; ‘CRISIL AA-(CE)/Stable’).

 

The impairments (to the tune of Rs ~1000 crore) due to the sale of the five BOT assets and the exit to be provided to SBI Macquarie have been accounted in the profit and loss statement of ABL and ACL in the last two years; CRISIL Ratings expects no further impairment due to this transaction.

 

CRISIL Ratings has fully consolidated debt in subsidiaries guaranteed by ABL/ACL in its assessment. Such debt associated with five subsidiaries in concern is expected to come down post conclusion of the transaction. Additionally, any support to the five BOT assets in fiscal 2023 and beyond will be reimbursed by KKR affiliate to ABL based on a back-to-back agreement.

 

ABL also has Rs ~2,000 crore claim from NHAI on the subject five BOT assets, which will not be transferred to KKR. Any cash inflow with realization of these claims will remain a key monitorable. Further, ACL is in advanced stages of discussion for monetising Jaora-Nayagaon toll asset and has signed an SPA with National Investment and Infrastructure Fund Ltd for sale of GVR Ashoka Chennai Outer Ring Road for Rs 686 crore in fiscal 2023 which will help offset the losses on the sale of 5 BOT toll assets.

 

On the business performance front, operating income is expected to grow by 18% in fiscal 2022, driven by healthy execution in the engineering, procurement and construction (EPC) segment (fiscal 2021 EPC revenue and toll collection were impacted due to the weak first quarter of 2021 on account of the first wave of the Covid-19 pandemic). Order book is estimated at Rs 15,000 crore in fiscal 2022, to be executed over the next three years. Though operating margin remained healthy at around 11% in the first nine months of fiscal 2022, it has moderated to some extent compared to the same period of the previous fiscal owing to higher inflation and delay in right of way (ROW), leading to suboptimal utilisation of fixed costs.

 

As on December 31, 2021, total order book of ABL stood at Rs 12,252 crores, translating to order book to revenue ratio of ~3.9 times in the first nine months of fiscal 2022, providing revenue visibility over the medium term. Of the total order book, contribution from roads hybrid annuity model (HAM) and roads EPC was Rs 2,638 crore and Rs 4,995 crores, respectively; power transmission and distribution (T&D) & others were Rs 1,902 crores; railways was Rs 729 crore, buildings EPC was Rs 1,905 crore and CGD contributed to the rest.

 

The financial risk profile remains healthy, with sufficient cash accrual and moderate debt levels. Tangible networth is estimated at Rs 2,595 crore and adjusted gearing at around 0.36 time as on March 31, 2022. Networth should improve to Rs 3,564 crore, while gearing is expected at around 0.38 time by March 31, 2024. Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage are estimated at 0.47 time and 7.96 times, respectively, in fiscal 2022.

 

Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and moderate cash and equivalents. Expected cash accrual of over Rs 500-600 crore per annum over the medium term, should suffice to cover the yearly maturing debt of ~Rs 100 crore from fiscals 2023 to 2025.

 

The ratings continue to reflect established track record in executing EPC contracts and BOT road projects and robust order book, providing healthy revenue visibility. The ratings also factor in adequate financial risk profile amidst expectation of funding support and investment in subsidiaries, ACL and Unison Enviro Pvt Ltd (UEPL). These strengths are partially offset by large working capital requirement and susceptibility to intense competition and cyclicality in the construction industry.

Analytical Approach

CRISIL Ratings has moderately consolidated ABL with its special purpose vehicles (SPVs) -- ACL, and UEPL. The debt in ABL's SPVs is non-recourse to ABL, and in line with the moderate consolidation approach of CRISIL Ratings, the investment requirement, expected cost overrun in under-implementation projects, as well as cash flow mismatches in operational projects of ABL, have been factored into the financials of ABL. ABL is expected to extend equity and support towards cash flow mismatches in ACL and UEPL. CRISIL Ratings has also consolidated the debt of ACL guaranteed (unconditional and irrevocable) by ABL and debt in UEPL, which is also guaranteed (unconditional and irrevocable) by ABL, while assessing the credit risk profile of ABL.

 

Furthermore, interest-bearing mobilisation advances (Rs 278 crore as on September 30, 2021) have been treated as debt.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established track record of executing EPC contracts and BOT road projects

Experience of over two decades in the EPC business and established relationships with state government departments, NHAI, and the Ministry of Road Transport and Highways should continue to support the business.

 

The company was one of the early entrants in BOT road projects in India, and won its first project in 1997. Along with ACL, it currently has 23 such projects (of which five BOT assets are being sold to KKR affiliate). 17 of these assets are operational, five under construction, and one is yet to achieve financial closure. Over 11,800 lane kilometre (km) has been constructed so far and nine completed projects have been successfully handed over.

 

Of the portfolio of 25 projects, 13 (six BOT toll and seven HAM) are housed under ACL. Out of the total 11 HAM projects with the group, five are in the operational stage, five are under construction and one is yet to achieve financial closure. Few under-construction HAM projects had ROW issues but these are expected to be completed on time given the strong track record of the EPC contractor and six months of extension due to the Covid-19 pandemic. Nonetheless, progress of HAM projects will remain a key monitorable.

 

The orderbook of ABL has evolved over time. The company has shifted its focus from bidding for BOT and HAM projects to EPC projects. ABL aims to become an all-sector EPC player over the medium term. The company has ventured into the following: roads, power (10 years), rail (five years), buildings (one year) and has entered into sewage, smart infra and solar projects recently.

 

ABL’s strong project execution capabilities are reflected in successful completion of projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The group also manufactures readymade concrete and high-grade bitumen, which supports operating efficiency, reflected in a moderate operating margin of 11-15% for the five fiscals through 2022.

 

• Robust order book providing strong revenue visibility

The company has an order book of Rs ~15,000 crore in fiscal 2022, with the order book to sales ratio estimated at 3.2, which will help the company achieve strong revenue numbers in the coming fiscals as the orders are to be executed over the next three year. Around 62% of orders (as on December 31, 2021) are from the road segment, while 17%, 6% and 16% are from power T&D and others, railways segments and buildings, respectively. Of the road orders, HAM and EPC account for 21% and 41%, respectively.

 

The company recently won orders worth Rs 2,218 crore, which includes orders from Bailey Properties, the Belgaum to Sankeshwar EPC road project and sewage treatment plant project from Municipal Corporation of Greater Mumbai that were received post the third quarter of fiscal 2022. The strong order book will help in healthy revenue growth of ~20% in fiscal 2023. 

 

• Healthy financial risk profile

Operating income grew by an estimated 18% in fiscal 2022, driven by healthy execution in the EPC segment. Order book is estimated at Rs 15,000 crore in fiscal 2022, to be executed over the next three years. Though the operating margin remained healthy at around 11% in the first nine months of fiscal 2022, it moderated to some extent compared to the same period of the previous fiscal on account of higher inflation and delay in ROW, leading to suboptimal utilisation of fixed costs.

 

ABL also booked an impairment (~Rs 769 crore) towards its investment in equity shares, compulsory convertible debenture and loan given to ACL, on account of the sale of five BOT assets to KKR and to provide an exit to SBI Macquarie.

 

Tangible networth is estimated at a strong Rs 2,595 crore and adjusted gearing at around 0.36 time as on March 31, 2022. Networth should improve to Rs 3,564 crore, while gearing is expected at around 0.38 time as on March 31, 2024. ABL follows a conservative financial policy and hence the capital structure remained healthy over the years. Adjusted debt increased to an estimated Rs 931 crore as on March 31, 2022, from Rs 739 crore a year ago due to rise in corporate guarantees (CGs) given by ABL. Total outside liabilities to adjusted networth (TOL/ANW) ratio is estimated at around 1.0 time as on March 31, 2022 and projected at 0.89 time as on March 31, 2024. NCAAD and adjusted Interest coverage are estimated at 0.47 time and 7.96 times, respectively, for fiscal 2022.

 

About 31% of ABL’s networth is locked in investments made in the underlying BOT and HAM portfolio. Further, the company is expected to invest around Rs 600 crore over fiscals 2023 to 2025, towards equity commitment of ongoing HAM projects and investments in CGD business along with financial support for meeting cash flow mismatches at the underlying SPVs. Internal accrual will fund incremental working capital requirement and support the future growth of ABL. Major maintenance works in two projects were completed in fiscal 2021 and is being taken up for four BOT projects in fiscals 2022 and 2023. However, any support requirement from ABL in the five BOT assets post fiscal 2022 will be reimbursed by KKR affiliate. Post-transaction support to underperforming BOT assets will not be required.

 

ABL has been infusing the entire equity commitment towards HAM projects under ACL, including the share of SBI Macquarie. ACL has raised Rs 250 crore till now, used to pay off unsecured loans from ABL. Post September 2022, ABL will be a 100% shareholder of ACL and will fund all equity commitments.

 

Weaknesses:

• Large working capital requirement

The working capital cycle may remain stretched, given the high dependence on state and central government authorities for receipt of payments. Further, in the power T&D segment, working capital requirement is higher because 20% of the payment is received once the project is operationalised, which usually takes two years and 10% of the contract value is held as retention money until the expiry of the warranty period that usually takes five years.

 

However, the working capital cycle has been comfortable over the years, with gross current assets (GCA) estimated at around 140 days as on March 31, 2022 (137 days a year ago).

 

• Susceptibility to intense competition and cyclicality in the construction industry

Around 62% of ABL’s outstanding orders as on December 31, 2021 comprised projects from roads and highways, and the remaining from the power T&D, railways and CGD segments. Although the company executes projects across various modes (BOT/EPC/HAM) in the roads segment, revenue is susceptible to changes in government regulations and economic conditions. Limited diversity in revenue will keep it susceptible to intense competition and cyclicality inherent in the construction industry.

 

Additionally, even though operating margin remained healthy at around 11% during the first nine months of fiscal 2022, it moderated to some extent compared to the same period of the previous fiscal owing to higher inflation and delay in ROW, leading to suboptimal utilisation of fixed costs.  The margin is projected at ~12% over the medium term.

Liquidity: Strong

Liquidity may continue to be supported by healthy cash accrual, unutilised bank lines, and moderate cash and equivalents. Cash accrual is projected at more than Rs 500-600 crore per annum, sufficient to cover the maturing debt of ~Rs 100 crore per annum from fiscals 2023 to 2025. Fund-based bank limit utilisation remained low at 25% during the 12 months through February 2022. The company uses non-fund-based facilities for meeting working capital requirement. Utilisation of these facilities averaged 67% for the 12 months through February 2022. Furthermore, an established relationship with suppliers results in long credit period and hence, lower dependence on own funds. Unencumbered cash and equivalents stood at Rs 26 crore as on September 30, 2021.

Outlook: Stable

CRISIL believes ABL's business risk profile will remain healthy over the medium term, driven by moderate growth in revenue, in turn led by strong outstanding orders and execution capabilities. The financial risk profile is expected to remain comfortable, marked by healthy capital structure and debt protection metrics.

Rating Sensitivity factors

Upward Factors:

• Substantial and sustained growth in revenue of more than 20% and profitability upwards of 12-14% while sustaining the capital structure
• Improvement in working capital management
• Strengthening of the capital structure through divestment of stake in HAM projects
• Receiving substantial amount of the claim from NHAI leading to improvement in financial profile

 

Downward Factors:

• Sustained weakening in TOL/ANW ratio to 1.5 times or more
• Stretch in working capital cycle
• Delays in completion of under-construction projects or deterioration in performance of operational projects, leading to stagnation of revenue while operating margin declines to below 10%
• Significant delay in completion of announced transaction or any new sudden/unexpected impairments on the books of ABL/ACL for ongoing or new transactions

About the Company

ABL, incorporated in 1993, engineered and constructed residential, commercial, industrial, and institutional buildings until 1997. The company won its first BOT project in 1997. Currently, operations comprise BOT and EPC road projects, EPC power T&D projects, collection of toll on roads and bridges owned and constructed by third parties, and manufacturing of ready-mix concrete. The company also ventured into the commercial gas distribution business in 2016 by winning its first order to build and operate a gas distribution network in Ratnagiri district, Maharashtra. Additionally, the company entered into executing smart city construction projects in 2016.

 

ABL is listed on both the Bombay Stock Exchange and National Stock Exchange. It has significant experience in executing road projects across India and has constructed more than 11,800 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 25 projects (including ACL assets) as on fiscal 2022. In the EPC division, ABL constructs roads and bridges for its own BOT projects as well as for third parties. It also executes EPC projects in the power distribution space for various state governments.

 

ACL was set up in November 2011 as a subsidiary of ABL, where six BOT projects were transferred to the former. SBI Macquarie also infused Rs 800 crore (39% stake at the time of entry), and ACL acted as an exclusive BOT project developer for both ABL and SBI Macquarie. Out of 11 HAM projects awarded to ABL, seven were housed under ACL. Currently, ACL has entered into a deal with KKR, for sale of the entire share capital held in five toll projects held under ACL for an aggregate consideration of Rs 1,337 crore which will provide an exit to SBI Macquarie (34% shareholding in ACL) at Rs 1,200 crore.

Key Financial Indicators- adjusted by CRISIL Ratings

Financials as on / for the period ended March 31		2021	2020
Revenue	Rs crore	3818	3937
PAT	Rs crore	408	387
PAT margin	%	10.7%	9.8%
Adjusted debt/adjusted networth	Times	0.25	0.3
Interest coverage	Times	8.55	8.75

For the nine months ending December 31, 2021, ABL posted revenue of Rs 3,032 crore and PAT of Rs (497) crore, as against Rs 2,431 crore and Rs 259 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable